Blog Archives » February 2006

A frustrating day of FOREX trading

I had a frustrating day of FOREX trading today, after learning about how to properly use Bollinger Bands yesterday and then spotting where I had missed out on opportunities today I was trying too hard to find something to make a winning trade on.

The problem from what I can tell is that yesterday there was a big move upwards on a lot of the currency pairs (specifically AUD/JPY, AUD/USD, EUR/USD) and so it wasn't too hard to open a long position and then it would continue up, today it hardly moved, so positions I opened today thinking I'd cash in when the trend kept going haven't really done much for me.

Oh well, all part of the learning process. 

Could it be possible?

I'm starting to wonder if maybe I've worked out how to be a little more succesful... yes I know counting my chickens waaaay too early, though this afternoon I've made some trades that have actually done what I was expecting. At present I'm up about 40 pips, which while nothing special for more seasoned traders, I'm very happy that recently I've managed to pick a couple of nice places to trade in the last couple of days. I've picked more losers still though once I get better at picking the winners I'm sure I'll stop being an idiot and making silly speculative trades.

The trick that I've been using... absolutely nothing special, just going with the longer term trend, have been mainly looking at the 60 minute and daily charts to determine what is happening longer term and then I'm just sitting on my positions without getting worried and closing out when it temporarily goes the wrong way, seems to be very easy to do that when looking at small time intervals.

Will see if I counted my chickens too early soonish and will let you know.

Learning from my mistakes

So now that I've got some trades that are doing well for me, and have had some dodgy ones that only lost me money I think I can honestly say that the only time that I (speaking as a beginner in FOREX) should ever take a position is when there is a long (I'm talking a trend over a few days though it might be short term for some long term traders) term trend.

I shouldn't look at anything less than a 60 minute chart except when I'm trying to find the optimum time to make a trade or I'm watching for a swing which won't show up early enough on a 60 minute chart.

Another mistake I've been making is to set my stop loss too low so it gets triggered easily.

Oh well, these thoughts sound great in theory, lets see if I can consistently pull them off :) 

I think I did it correctly

I mentioned that I was on a nice uptrend last night, well this morning I closed my positions after the gbp/jpy dipped below the level of support I had drawn, waiting for it to get down near the level of support line cost me a bit, though overall I'm very happy that I've managed to pull off a nice profit and now my account balance is actually going in the right direction!

Here's a 15 minute graph of my trades, after it hit the peak I made another buy trying to anticipate the bottom of the wave, it was a bit of a loser.

And here is the 60 minute chart of my trades.

It will be interesting to see if the uptrend continues, and if so I may well buy into it again, I've decided not to go short since I made a rule that I wasn't going to go against the trend, and the trend is still showing upwards.

Lets hope that I can make some more good trades like this and work back my account deficit. 

Going short wasn't a good idea

This is a follow on to my previous post where I was all happy about having made some big gains. 

After I saw that the shortish term trend had swung downwards I thought I'd open up a short position and it wasn't a good idea (at least not where I opened it), I lost as it went up shortly after I opened the short positions hehe

I've seen that the daily trend is still on the climb (though a bit slower) so I've decided to go long and see what happens, stop loss is around 50 pips below where I bought.

I will learn, I'm just thankful that I'm able to burn pretend money rather than my own :)

Update: Going long was a worse idea, down about 40 pips hehe 

Definately a fluke

My good luck yesterday was definately a fluke, every trade I've made since closing my profitable ones has been a loser (well almost, had a couple that were only just profitable).

At present I'm down over 80 pips with 3 trades... it seems I'm going long at the top of the peaks, short on the bottom of the troughs hehe

I will need to go back and read my patience patience patience post. Maybe I should print it out in BIG letters and stick it to my monitor!!!

Technical Analysis Studies

A while back I mentioned that I thought it was great that the FOREX markets close for the weekend, well I have to say it also frustrates me a bit :(

I'm sure it's great for the sanity of traders that they can have 2 days off without needing to worry about being close to the action, though I want to learn more! I've decided that I will do some research into what the different studies mean, how to read them and see if I can determine which of the studies might help me the most in my learning of technical analysis.

I may even go back and do what I've heard called "back testing" where you scroll back on your timeline and see if you can predict what will happen... it's rather boring to do though I guess less time consuming to see many different scenarios.

Some of the technical analysis studies that I'm planning to research are: 

• Bollinger Bands (I already have though will research them a bit more)
• EMA, Exponential Moving Average (very similar to the WMA)
  
• Parabolic SAR (The SAR stands for Stop And Reverse)
  
• SMA, Simple Moving Average
  
• WMA, Weighted Moving Average
  
• ADX, Average Directional Index
  
• ATR, Average True Range
  
• CCI, Commodity Channel Index
  
• MACD, Moving Average Convergence/Divergence
  
• Momentum
• ROC, Rate of Change
  
• RSI, Relative Strength Index
  
• Standard Deviation
• Stochastic RSI, Stochastic Relative Strength Index
  
• Fast Stochastic
• Slow Stochastic
• Full Stochastic
• Williams %R

These are the studies that are available in the Oanda FXgame user interface which is what I'm using to learn about trading FOREX. Hopefully I can find some examples for each of these studies through back testing, in which case I will try to post an example or 3 of each one. I can't promise how quickly I will get them researched, I would rather spend more time on each one so that I learn it properly rather than skimming over them all quickly without actually learning anything much.

I will also see if I can learn a bit more about the usage of Fibonacci to help make predictions. Fibonaccci techniques I will study are:

• Fibonacci Arc
• Fibonacci Fan
• Fibonacci Retracement
• Fibonacci Timezones
• Speed Lines (aka Speed Resistance Lines), don't think this if fibonacci though since it isn't an automated study (it probably isn't even called a study) I'll include it here.
  

I will also research the different chart patterns that can indicate a change is coming, though I will leave that for another time.

One thing that I find so great about technical analysis is that once I learn how to do it successfully I don't need to just restrict myself to FOREX, any charting analysis is possible (assuming it is many human actions which are causing changes in the charts being analysed).

If you ever have any comments or can help me, feel free to email me newbie at forexhowto dot com. Feel free to bookmark this post, or maybe you'd like to bookmark the new Technical Analysis section where I will publish all my technical analysis findings.

New Research Posted - Weighted Moving Average

I've researched the Weighted Moving Average today (what better to do on a sunday morning? thankfully I'm off to a photography exhibition this afternoon).

I'm far more impressed with the WMA than I was with the SMA, the SMA was so incredibly slow at detecting a change in trends, so much so that most of the time the lines would only cross when more than half trend had passed!

Probably the SMA has uses in markets which aren't extremely volatile, or in analysing very long term trends. Next up will be the Exponential Moving Average.

The psychology of learning FOREX

You know, after I did some reading of the moving averages theory, and earlier the bollinger bands theory, I just couldn't wait to start trading so that I could put my new found knowledge to work. Sadly, again I wasn't disciplined and I'm copping a hiding! I'm becoming a bit of an expert at choosing the tops of the peaks to go long, bottom of the troughs to go short hehe

I really need to get the psychology worked out so that I can make consistent profits.

Oh well, it's all a learning experience for me :) 

Mini FOREX trading accounts versus full FOREX trading accounts

During the weekend I was having a look at the differences between mini FOREX trading accounts and comparing them to the full trading accounts.

One thing which I haven't been able to figure out is why anyone (I'm excluding the non beginners since I'm nowhere near being anywhere near them in terms of capital or risk taking) would choose a full trading account. The way I see it is that until you are investing more than $10k you would be mad to not make use of the better leverage and extra flexibility.

Generally what I found was that most full FOREX trading accounts have a minimum of between $3,000 and $5,000 with leverage being 100:1. Lots are $100,000 so each lot costs you $1000.

The Mini FOREX trading accounts on the other hand generally have a minimum of between $300-$500. Leverage is normally 200:1 with lots being $10,000 so each lot only costs $50. The great thing about this setup is that you get a lot more flexibility, assuming you have the funds there is nothing stopping you from buying 10 lots and taking advantage of the additional leverage. Though the risk is reduced for single lot positions that you take. Of course it sucks when your account goes over the $10,000 maximum level that most brokers have for their Mini FOREX trading accounts. Though hopefully if you can work it up to there then you'll do as well (except for only getting half the leverage) with a full account.

Needless to say, I will be running with a Mini FOREX trading account when I make the switch to real money. Having thought about it, I don't think a Micro Mini account is worth it.

The Dodgy Side of FOREX

Most industries that can be extremely profitable though need a reasonable level of knowledge prior to becoming successful tend to have similar sides to their industries. When you are learning about FOREX you will undoubtedly come across many claims of easy methods to make a fortune, live in the caribbean while your investments make you millions etc. etc.

If you take the time to read through them, some of them are really very convincing... though the simple fact remains, if it is so successful why on earth aren't they raking in millions from using the techniques??

Here's a story about a place that has a system called 4xMadeEasy.

While I would never consider buying a system like that, it's good to know that my suspicions are correct. If I'm going to spend any money, it won't be on a product that looks very much like a scam. It will be purchasing a very thorough technical analysis book. I think that would be some of the best money I could possibly spend to help me improve my knowledge.

Trends are wonderful

When I think about technical analysis, I think of it as being extremely complex, full of algorithms and secret knowledge that makes those in the know almost spookily good at predicting things. While I'm 100% certain that some people are excellent technicians, I think that the next best thing for a beginner is to simply look at the longer term trends and go with the trend.

What I've been finding successful recently is looking at the daily charts, when I see a trend forming I go to something like a 60 minute chart or even finer to pick where I want to take a position (ideally at the peak or trough of a wave, depending on if I'm going long or short). After I've opened a position I've been setting my stop loss to just beyond the previous day's high or low (depending if I'm long or short), as the price moves I move the stop loss to counter any swings that aren't simply waves (I've been moving it to slightly above the previous wave, when short, slightly below when long) . I've yet to come up with a good take profit strategy, though generally I'm setting it to where the price may get to in a couple of days (I do it by roughly putting it at 1.5 times the distance of the biggest difference between open and close of the candlestick bars that I'm looking for, either gaining or falling).

While it's still very early days for me as a trader, I thought someone might find this useful, and maybe sometime in the future I can look back and laugh at myself :) Still I think it's important to start with the basics and gradually get more advanced. And hey, since late yesterday I'm up about 190pips :D

For future reference and so that others understand what I consider a trend here's a screengrab of the current AUD/JPY daily chart showing my short positions.

I'm always keen to learn, if you think I'm an idiot or maybe what I wrote actually helped you :O then feel free to tell me newbie at forexhowto.com 

What is the best amount of leverage?

I wrote the other day about how mini accounts were better because you got more leverage.

Well today I discovered the forums on Oanda and read a great article outlining why high leverage is a BAD thing. Well worth a read before putting real money on the line.

I guess I should do more reading about risk management. 

Dan Zanger, how to make a LOT of money

I was told about this guy called Dan Zanger a while back, if you want some inspiration about how much money can be made through trading... then this guys stuff is the stuff to make you get inspired.

Formerly a pool contractor, over several years he honed his trading strategies until he became an absolute success.

After he worked out a strategy he invested $11,000 and 18 months later that had become $18 million, then he grew that $18 million into $42 million!!!! It's a world record for greatest percentage increase.

Dan Zanger made all his money through trading on the stock market. What is great is that a lot of the information about his strategy, what he looks for in a stock etc. can be read on many sites around the internet, such as this article on investopedia.

What surprised me when I heard about it was that he did it with 2:1 leverage which when you think that you can have up to 200:1 leverage with some FOREX brokers you think, damn he could have made a lot more with more leverage. However after reading the post about what is the best amount of leverage , I realised that maybe Dan Zanger only using 2:1 leverage was part of the reason that he actually did so well, rather than get wiped out by his bad calls he was able to recover without too much trouble.

If you want to read more about Dan Zanger, you should probably check out the media section of his website.

When I was told about Dan Zanger I didn't ask how you spell his name and for some reason I had a lot of trouble spelling it, so here are some alternative spellings that I tried before I figured out the proper one: Zangar, Zanga, Xanga, Xanger, Xangar... I can't remember the others that I tried. 

In some more personal news: I'm still making profits :D I closed out my big money making positions at close to the right time, since then I've just been making a few small short term trades that have mostly all gained a little bit, at least no big losses. I think I've also changed my leverage (though I thought I changed it to the highest leverage), since now a few pips isn't much in a money sense... will have to figure out what is going on, it will take me a while to work back my deficit at a couple of dollars a pip ;) Don't I sound like a fool writing about how it's good to have low leverage then saying that I want big leverage to get rid of my deficit hehe

The best trading platform?

Since I became interested in trading FOREX I've been trying out various trading platforms (is that the correct term??). I've found that there is 2 types of client, one is a Java client which can run on any computer that has the Java Virtual Machine installed, the other is a Windows based program which as you might have guessed only runs on Windows.

Due to the nature of my work, my operating system of choice is Linux (lets me do stuff quicker and easier). So I've predominantly been evaluating Java based trading platforms. Of the Java trading platforms that I've evaluated my favourite has been Oanda's. Of the Windows based trading platforms I've evaluated FXCM's trading platform has been my favourite.

Well yesterday I found what I believe to be the ultimate in trading platforms (Only issue is that I need to be running Windows). It is called MetaTrader 4, a free trading platform that is FULL of technical analysis goodies. And best of all as far as I'm concerned as a programmer... it has it's own scripting language that allows you to create all sorts of custom indicators and even code up experts to tell you when to make trades, you can even set it to automatically make them for you!

It provides access to years and years of historical data to allow you to perform back testing, and when you create a trading system you can automatically test it across months or years of historical FOREX data to see if it is actually likely to be successful!

I have a couple of gripes about certain user interface issues (I wish I could set my charts to automatically come up as candlestick charts with green indicating bullish bars, red bearish), though I think I have figured out how to get around them through the use of profiles.

Candlestick Charts, Should they have gaps in data?

After I learnt how to read them, I quickly became a fan of candlestick charts. When I can set them to my preferred red and green, candlestick charts provide me with a very quick and easy way to read what is happening.

While I've been evaluating metatrader 4 I've been experiencing something that I think is a bit odd. The bars on their candlestick charts don't always open at the same price that the previous one closed at. After doing some research I found that it's actually normal for one bar on a candle stick chart to not open at the previous bars closing price, they call it a gap... or if you talk to the Japanese who invented candlestick charting, they call it a window.

From what I was able to find out online, the reason that a gap or window occurs is that trades have been made outside of trading hours eg. a publicly traded company releases information outside of trading hours, many investors might get this information and put in buy or sell orders which are to be executed first thing in the morning, this can cause the opening price to differ from the previous sessions closing price.

How this happens in FOREX I do not know. I can understand if this happens when the market closes for the weekend, though when it happens mid week on hourly charts I can't understand the reason, I will do some more digging and see what I can find out.

60minute Candlestick Chart showing gaps

Update: I've worked it out thanks to this thread. The way they are counting it is that the close of one bar is the last trade during that period. The opening price of the next period is the first trade of that period.

Developing an Automated FOREX Trading System

The last couple of days I've been playing with Metatrader4 and experimenting with creating expert advisors, I've been trialing them on historical data and believe it or not, I actually managed to run profitable simulations!!! sometimes hehe

It seems that creating a system which runs profitably across all the currencies and across various time periods is a little more involved. I'm not sure if this is due to the quality of the historical data or if it's just the nature of the game.

The experts I created all only focused on finding and executing long positions (just laziness, if I created something that worked well with long positions then I was going to add in short position detection). The first one I created looked at weighted moving averages and opened a position when the short term average crossed to the high side, it also closed out when it crossed back across the long term average. Obviously if this is all that the system does then there is a lot of money being thrown away as you can normally exit a long time before it crosses back across the long term average. To combat this I experimented with detecting the peak of the short term average, being lazy I only did this by finding out when it started going back downwards.

Of the systems I experimented with I thought that the moving averages had the most promise and sometime I may return to it and add some of the following features:

1. Detection of the angle of the short term average.
   If it is going up quickly then I want in, if it is almost at the same angle as the long term average then it's probably nothing special.
   
2. Better detection of the peak of a trend will help the profit go up by a lot.
3. Opening Short as well as Long positions... this should hopefully double(?) the profitability of the sytem.

When/if I make these changes I will post the code for you guys to hack to pieces, or maybe to make your millions :)

As I look a little more at the maths behind investing, it is a little more obvious to me that it isn't an easy way to make a living... and it's not just the picking the right trades part of it ;) The less you take out of your trading account to pay bills etc. then the more profitable you will be in the future, will do some research into when is the right time to take money out and how much sometime in the future... not that I'm anywhere near putting my real money into the big trash can. 

I think for a little while now I will just look at doing manual trading and see if I can keep making back my deficit. I think it's always good to do things the hard way at first and then when you are good at them then look for shortcuts to make your life easier.

Will my long term strategy work?

I opened a position a few days ago on the USD/SGD as I was anticipating a breakout, thus far it hasn't happened though I'm still holding on as I think the signs are still showing that it should breakout sometime soon and I might actually be on it from the beginning.

Here is the current daily chart of the USD/SGD which shows where I opened my position and the fact that I'm down by around 30 pips.

I opened my position there because I saw that there appeared to be resistance and it was near a one year low (I've set my stop loss at that level). The bollinger bands are quite compressed (they looked to be compressing even more when I opened my position) which would tend to indicate a big move is in the works, since we're almost at the 1 year low I'm predicting that it will be a breakout rather than a breakdown. I've set my take profit at the Fibonacci retracement 50% line, there was a small resistance line on the way down at that point so I've set it there (a bit over 300pips, so if it comes off I'll be happy).

I will let you know if my long term strategy pays off :) 

In other news: I went back and had a read of the FOREX project blog to see how he is going and if I could learn anything, I learnt that he is making nearly all profitable trades! He's making very few of them, though who cares if they are all profitable!

How long should I wait?

I'm getting a bit impatient with my long term USD/SGD long position and I'm starting to think about closing them next time there is a small wave which makes it profitable.

I have also been a little stupid and opened another long position during one of the troughs, however that position was only 10,000 rather than 100,000.

Maybe the trick for me to not get impatient is to just not look at them... that way when I login in a few months time there will be a nice 300pip profit. My only issue is that it's a rather slow way to gain 300pips.

Here is the current daily chart

Update: after writing this post and looking at the chart I realised there was a pretty obvious support line which was going UP (see the yellow trendline I drew in when writing this update), so I will be holding my position. 

New Design

I had some time to kill the other day on a different computer so I spent it playing very short term idiot trader (I actually didn't do too badly). since this site is getting a few visitors nowadays I thought that I should also knock up a design that would look a little more like a proper website rather than just the thrown together pile of garbage content that it really is ;)

I hope the green doesn't hurt your eyes too much, if I get enough complaints I'll think of something a little more friendly.

New Research / Technical Analysis Article

I was lazy and didn't get around to doing the EMA (Exponential Moving Average) because well it's basically the same as the WMA with slight differences, though not enough for me to notice. So instead I moved on to a completely different indicator and a very nice one it is. The latest article to be added to the Technical Analysis section is the CCI (Commodity Channel Index).

I thoroughly recommend that you check it out if you haven't already, it's one of my current favourites for opening and closing long positions.

The most profitable currency pairs

Rich from over at forexproject.com has written a post detailing which currency pairs have been most profitable for him. I find his results quite interesting because I think (I haven't actually looked at the numbers) by far the */JPY currency pairs have been most profitable for me as well.

Seeing that someone else has also found these currency pairs to be the most profitable is a good reason for me to focus on these currency pairs instead of trying my luck on the EUR/USD.

Here are Rich's results, I think you'll agree they are interesting!

USD/JPY: +3720
EUR/JPY: +2400
GBP/JPY: +1370
USD/CAD: +890
NZD/USD: +470
USD/CHF: +420
EUR/GBP: -70
AUD/USD: -130
GBP/USD: -$410
CHF/JPY: -650
EUR/USD: -$1430

Big Stupid Mistake

When a trend is getting towards the end, do not make a big trade.

I got a little impatient with my account deficit and thought I'd try trading a million in the hope that I would make big bank from it... I thought I had found a great downtrend with the CAD/JPY and so I took a short position with $1,000,000. It went well for a while and I started to make a nice profit, then I had to go grocery shopping and so I left it with a stop loss that while it was pretty low (around 15-20 pips) I thought there was no way it would get triggered unless there was a trend reversal.

Well... as you can probably guess from the title of this post, it all went horribly wrong!

I've just logged in to see that after continuing to fall, the price had a sudden spike which triggered my stop loss and kept going a bit higher, then it fell rapidly again.

I've taken a couple of screenshots which will hopefully remind me someday how much of an idiot I was today!

Close up view showing where I opened the trade and where the S/L was triggered.

Chart showing the trend and where I opened my trade and where it was stopped by the stop loss.

I'm going to close it early

I've mentioned my long term strategy experiment that I've setup on the USD/SGD and that I've been frustrated waiting for it to become profitable. Well I'm sick of waiting for it and I'm going to close it next time the price spikes to a position where I will have made a little bit of a profit.

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